Economic and Investment Analysis from a former Punk Rocker and Healthcare Economist. Economic analysis of international issues, domestic matters, and anything that could affect your investment portfolio in this Secular Bear Market. But there is more, lots more. From the Fed to funky 70's cinema, everything is up for trenchant comment and sophomoric smear. Funny, irreverant, often irrelevant. Welcome to the Desert of the Real!

Tuesday, January 10, 2006

OUR BRAVE NEW WORLD SEEMS LIKE THE SAME OLD PLACE.

WHAT WORKS IN THE DESERT OF THE REAL WORKS IN OUR BRAVE NEW WORLD.

The GaveKal authors of “Our Brave New World” have a couple of chapters on investing in the Platform Economy era. They, like this Author, generally reject broad indexing as a means of investing. In the opinion of the GaveKal authors, index investing (such as the popular S&P 500 index mutual funds), allocate capital by means of the size of companies, not their ability to earn better returns on invested capital. Readers know that the S&P 500 index is a capitalization weighted index and “overrepresents” a handful of stocks and “underrepresents” most other stocks in the index.

The investment style recommendations of the GaveKal authors are similar to the Author’s investment style. First and foremost, absolute return investing. DO NOT LOSE MONEY. Even if you only squeak out a point or two when the market is down 5%, you are earning big.

We are players not gamblers. We train and play to WIN GAMES, not just BEAT THE SPREAD. Second, follow the trends and buy what is moving up. Sell when the momentum stalls out. The GaveKal Authors lay out some more ideas:

1. Means reversion investing. Buy what is undervalued and sell what is overvalued. All assets rise and fall in price and will eventually revert to a mean valuation. (That is in effect the concept behind the Secular Bull and Bear market strategies. Stocks, over long periods of time, swing from overvalued to undervalued.) Two well-known mutual funds that follow this means reversion strategy are the First Eagle Family of Funds[i] and the GMO funds[ii].

2. Carry Trade Strategies. This is a simple technique, in theory. Borrow money on one end of the yield curve where it is cheaper and loan it on the other end of the yield curve where the interest rate is higher. This is difficult for individuals to do without large amounts of capital and sophisticated strategies. But hedge funds engage in this practice and placing some of one’s portfolio in a carefully selected hedge fund can get some carry-trade exposure.

The GaveKal Authors also recommend timely investments in emerging markets and investments in the Platform Companies that they believe will dominate the world economy through the foreseeable future. The Author has large percentages of his portfolio in emerging markets through emerging market ETFs (exchange-traded funds).

LOTS TO THINK ABOUT, EH?

“Our Brave New World” is an interesting book and worth a read. It is fast paced and well documented. But is its Brave New World the Real New World?

The Author believes that the weak link in the Author’s argument is that China and other developing countries will not be condemned to remain in the low margin manufacturing business and will become the Platform Companies that design, market, manufacture and sell their products. A good bellwether of Chinese manufacturer’s success as emerging Platform Companies may come in the American automobile market.

A story on the AP Business Wire today (1.10.2006), “Chinese Automaker Plans Exports to US”[iii], states that two automobile companies in China plan to import autos to the US beginning in 2007. The article states:

Our goal is to present to the American people another choice for the family sedan, a vehicle that possesses the highest quality but is available at the lowest price," Li Shufu, chairman and founder of Geely, said in a statement Tuesday at the North American International Auto Show in Detroit.He said Geely "will bring to the people of the United States a safe, high quality, family-friendly automobile" for less than $10,000. Chinese rival Chery Automotive also plans to begin exports to the U.S., as early as 2007, in association with American entrepreneur Malcolm Bricklin's Visionary Vehicles. It hopes eventually to sell 2 million vehicles a year. (AUTHOR’S NOTE: IN FUTURE POSTS LONG BLOCKS OF QUOTED TEXT WILL BE ITALICIZED TO ASSIST THE READER.)

If these Chinese automobile makers can succeed as the Japanese companies have, two Chinese “Platform Companies” will be competing alongside GM, VW, Toyota, KIA, Honda and others.

ALL WORLDS IN THE DESERT OF THE REAL ARE BRAVE NEW WORLDS!

IMPORANT DISCLAIMER: This blog is offered for informational purposes only. Sources of information provided are believed to be reliable, but are not guaranteed to be complete or without error. Opinions and suggestions are provided with the understanding that readers acting on information contained herein assume all risks involved. The Author may or may not buy or sell securities discussed in this newsletter[i]http://www.firsteaglefunds.com/firstEagle/index.jsp. Approximately 20% of the Author’s portfolio is invested in First Eagle Global Fund. This fund has been closed to new investors since March 1, 2005. When the fund reopens, the Author will advise his readers of this fact.[ii]http://www.gmo.com/america. Jeremy Grantham is one of the principals of GMO and is frequently quoted in the Desert of the Real. A few of the Author’s extended family members own GMO funds.[iii]http://news.yahoo.com/s/ap/20060110/ap_on_bi_ge/china_geely_us;_ylt=Agb4kIORTABFrylsyrX3hL2yBhIF;_ylu=X3oDMTA5aHJvMDdwBHNlYwN5bmNhdA--